The information in this article is up to date through tax year 2019 (taxes filed in 2020).
Filing a tax return may not be your idea of a good time. But getting your tax refund – and deciding how to use it – can be pretty exciting. In fact, four out of five Americans say the best part of filing taxes is knowing that their refund is waiting. Below is a list of what to do (and what not to do) to set yourself up for financial success in the year(s) to come.
Pay down debt
There’s no arguing that paying off debt is a wise way to use your tax refund – but not all debt is created equal. Your high-interest credit card bills are “bad debt,” because all they do is hurt your financial situation. Financial advisors will recommend that you pay those down first. Any other debt – like if you borrow money to pay for education or to buy a house – is considered “good debt,” because these loans are creating long-term value for you. You can pay those off more slowly than credit card debt.
Start saving for retirement
Did you know that putting money away for retirement while you are employed can actually equal a tax deduction on your federal income tax return? Beginning in tax year 2019, you can deduct up to $6,000 ($7,000 if you’re 50 years or older) for contributions you make to traditional or Roth IRAs. Plus, you won’t have to pay tax on your withdrawals you make once you are retired.
Did you also know that IRAs can be used for college expenses? Check out What is the Better College Savings Plan: the 529 or the Roth IRA? to learn more.
Splurge (in moderation)
Maybe you’ve been waiting to replace a major appliance, or you’ve been dreaming about a new TV. It’s okay to reward yourself – especially with something you really need. You can use the remainder of your refund to pay bills or save for the future.
Start a business
In today’s gig economy, many people are exploring ways to earn extra income. Your refund could be a great way to pay those initial start-up costs and get your side business off the ground. If you make your side job a legitimate business – by forming an LLC, sole-proprietorship, for example – you could qualify for some significant tax breaks.
Make home improvements
Home improvements will not only make a home more enjoyable but also will increase its value and reduce taxes when it’s sold. Make sure to spend on capital improvements, such as building a deck, installing a hot water heater, or adding on an addition. Basically, anything that adds value or lengthens the useful life of a home is a capital investment. As upgrades happen, remember to keep track of improvement costs. They will come in handy when it’s time to sell.
Grow your emergency fund
How would you handle a financial emergency? Anyone at any moment could lose a job or have unexpected health, home or car issues. Be as prepared as possible. Take advantage of the tax refund by making a deposit in your emergency fund account.
Pro Tip: Don’t assume your refund will be the same each year
Changes to your family or work situation can have a big impact on your tax refund. So can changes to the tax laws. Just because you receive a sizable refund this year doesn’t mean you can count on receiving the same amount every year. The good news is, you can always estimate how big your refund is going to be with TaxSlayer’s free Tax Refund Calculator tool.
We did a little research and asked TaxSlayer customers how they would spend their tax refund in 2018, and here’s what they said (customers could choose more than one answer)*:
|Pay off debt||42%|
|Contribute to a retirement account||9%|
|Purchase an experience||13%|
As it turns out, the majority of TaxSlayer survey participants are either eliminating debt or saving money. Way to go, TaxSlayers!
*All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2388 adults, of whom 2049 file taxes. Fieldwork was undertaken between 21st – 22nd November 2017. The survey was carried out online. The figures have been weighted and are representative of all US adults (aged 18+).